Shipyard Contracts: New Construction vs. Ship Repair

August 2002

Contracts for the construction of new ships have many key differences from contracts for ship repair. The most obvious difference concerns the type of work (new versus repair) but other important differences exist concerning the nature and extent of changes, scheduling, engineering and contract claims. Attorneys and others involved in contract administration and dispute resolution need to understand these important differences.

Changes
Contracts for ship repairs are subject to extensive growth. The scope of work on repair contracts often includes a combination of detailed “upgrade” items and generally defined “open/inspect” work. The exact work content of the open and inspect items may not be known until the repairs have begun. Disputes may then arise concerning whether the items are included in the base contract. To price these items, repair contracts provide for unit prices and stipulated labor rates. For example, additional repairs may be priced by multiplying stipulated labor rates times the negotiated hours. Such provisions reduce pricing disputes.

In recent years new ship contracts have been awarded on the basis of a fixed price or fixed price with incentives, without anticipated additional hours and unit prices. However, change orders on new ship construction are frequently the result of technology advancements and regulatory revisions that occur during the design and construction period. Change order disputes often involve delays in approving and processing the changes that in turn may delay the new ship construction.

Schedules
The performance of both types of contracts involves expensive shipyard facilities and equipment that are often several times the facilities costs for building construction. One strategy to reduce the shipyard facilities cost is to reduce schedule durations by intensive staffing or subcontracted labor.

Ship repairs are often more labor intensive and of shorter duration than new ship construction. For example, many ship repair projects are done in less than 90 days with an expenditure of thousands of labor hours on a daily basis. Activity durations are labor critical, that is, the primary driver of ship repair schedules is craft loading. This may be why claimed damages in ship repair contracts tend to focus more upon labor disruption than delay costs.

Schedules for ship repairs generally have few logic ties, usually contract milestones such as complete machinery space, light-off electronics and weapon systems. Many activities take place aboard concurrently, and shipyards may allege that any changes or delays by the owner impact labor hours and time of performance. Another key scheduling challenge is to integrate the defined upgrade work with the unknown open and inspect items. In essence, ship repairs amount to work order scheduling, rather than project scheduling.

For new ship construction, the durations are longer and labor hours may be peaked for certain time frames and activities rather than maintained throughout performance. Repetition of production activities may be one key in reducing durations and labor hours. Shipyards often claim that owner disruption to repetitious activities both delays the completion date and increases the number of labor hours.

Network schedules are often maintained for new ship construction focusing upon both logical sequences and labor staffing. New ship construction milestones include keel laying, launching, and trials. Distinct tasks such as design activities, procurement, shop work, modular construction and outfitting are sequenced to allow effective schedule performance.

Engineering
On new ship construction contracts, detailed design engineering is often not complete before the actual construction begins. A certain level of design may have been done by a naval architect on performance criteria or by the lead shipyard responsible for engineering and building the first in a class of ships. Subsequently more detail design engineering is often the contractual responsibility of the shipyard constructing the follow-on ships. This allows the shipyard to focus on producibility in the detail design to the specific shipyard as a way to reduce the costs of building the ship. Successful performance of new ship construction contracts may depend upon the adequate budgeting and availability of an experienced design engineering department to perform detail design. This is often a source of problems and disputes on new ship construction contracts.

On ship repair contracts, shipyards provide more field engineering than design engineering. Because the exact number of open/inspect items is not identified until the work has begun, an extensive field engineering effort may be required to coordinate and implement the necessary repairs. Disputes often arise concerning timely action and response to the discovered conditions.

Modularization
For new ship construction, most shipyards “prefabricate” systems such as piping, HVAC ducts, outfitting steel or aluminum fabrications and electrical distribution. Many of these systems involve construction and outfitting of modular units. This may involve subassembly and modular assembly before on board final installation. Shop “throughput” is frequently critical for timely completion of new ship construction. Delays in the shop may be areas where shipyards contribute to program delays.

For ship repairs, use of modular units is limited due to the inability to install modules in the existing ship. However, pallets of work may be devised in shops for piping, sheet metal, and electrical items. Also, repair shipyards establish process lines in shops and designate areas of ships as zones for particular work (mechanical, electrical, etc.).

Otherwise modular ship units are not used for ship repair projects except in major upgrades where large portions of the ship are replaced.

Condusion
There is a difference between the types of claims and disputes on new ship and, ship repair contracts. These may be the result of the kinds of changes, the extent of undefined work, schedules, performance time, engineering, and production techniques used in performing the work. Both types of contracts are often subject to claims and disputes, particularly when awarded on a fixed price basis.